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Many of the investors that we work with at Cape May are familiar, and comfortable, with comparably high degrees of illiquidity. In most cases, that is by choice, such as when individuals invest a substantial share (25% or even more) of their overall assets into illiquid investments like PE or VC. But there are some cases where this is less deliberate, like a start-up investor who might’ve done a secondary but retains a stake in their business that makes up the vast majority of their net worth. So what if one of those investors requires liquidity, but doesn’t have a sufficient amount on hand?

They could try to sell their illiquid assets. But unless you have a stake in a unicorn or a ‘brand name’ fund, selling at a fair price (i.e. no massive discount to the market value) might be challenging: Assets like real estate or stakes in a start-up that’s performing well but not great might take time to sell. Or in case of a not-so-well performing start-up, a lesser-known fund, or even a large (but minority) position in your own company, there might simply not be any liquidity available. (For more thoughts and best practices on generating liquidity from your start-up investments, check out Liquidity Solutions For Your Venture Portfolio.)

Or they could try to borrow against their assets: Pledge their fund stakes or even the stake in their own company to a bank to access debt capital. As outlined above, they often have substantial value locked up in their illiquid assets - so can’t they access that somehow?

Unfortunately, things are not so easy. Over the last couple of years, I’ve spent a lot of time in my family office jobs, and with our clients, on accessing creative lending options. And as with other areas of life and business, there is a common trend: Those individuals who need debt the most get little to no access - while those who don’t need it can access it and sometimes truly frivolous terms.

In this week’s newsletter, let’s talk about the State of Lending. Let’s get started!

Before we get to more challenging matters, let’s begin with a bright spot: The humble margin loan.

A margin loan is a fixed-term loan or flexible line of credit collateralized by your liquid investment portfolio. This investment portfolio has a certain ‘collateral value’ depending on the underlying investments that can be accessed somewhat flexibly with this margin loan. If the collateral value is higher than the loan you took out, great - but if the collateral value is lower than the outstanding loan value, for example during a market downturn, you are required to either post additional collateral (i.e. send in more cash or investments from another bank or broker) and/or to sell down assets to repay the loan.

Margin loans are a very flexible, and reasonably priced type of debt. For affluent investors with investable assets of 2 to 20M€, we’ve typically seen a loan margin of ~80 to 100 bps over the reference rate (i.e. the EURIBOR for EUR loans). So for a loan based on the 1M EURIBOR (which stands at ~1,97% p.a. as I write this), you would pay 2,67% to 2,97% in interest per year. Not a bad interest rate, but of course, it can fluctuate - remember that in 2023, EURIBOR peaked at almost 4%, making such a loan more expensive.

Word of warning: While many of our clients use margin loans for cash management or even short-term expenses, we are a bit more sceptical. As often mentioned, we recommend that clients separate their portfolio into short-term (i.e. cash management) and longer-term components (i.e. your long-term oriented liquid portfolio or your fund investments). Drawing on a margin loan for cash management bears certain risks (some of which I outlined in Lines of Defense in January) which we think are better suited for the long-term allocation. But as also mentioned then, margin loans certainly deserve an article of their own at a later point this year.

What is certain: They are an accessible lending option to most affluent investors, even at the ‘lower’ end of the aforementioned 2-20M€ range. If not used too aggressively (i.e. a 20-30% LTV for a well-diversified portfolio), we’d generally see them as a flexible way of lending against your liquid portfolio to bridge any liquidity issues in your illiquid portfolio.

Let’s start with a glimpse of hope: Lending against fund portfolios (i.e. PE/VC funds) is generally possible.

Especially for ‘brand name’ GPs, banks and non-bank lenders are generally willing to provide credit. First, because funds are in themselves diversified,  leading to a degree of ‘downside protection’ for bank and investor. In the case of GPs of substantial quality, I would find it very unlikely for an investor to actually lose money (of course, there is no guarantee that that will be the case, nor is there a guarantee that the investor will make money.) Second, This is further enhanced in the case of a fund portfolio with a diversification across funds, geographies, and vintage years. Lastly, while technically an illiquid asset, especially ‘brand name’ funds tend to have a secondary market, either on a bank’s own platform or when including secondary funds.

If a bank is ‘willing and able’, terms can come close to a margin loan. We’ve seen LTVs in the range of 10-30%, with interest margins of 200-300 bps (i.e. 4-5% at current levels) or sometimes at a more ‘absolute’ level around 7-9% - in return also dependent on the LTV (i.e. higher interest rates for higher LTVs). Terms also tend to be more favorable when funds are custodied on the lending bank’s platform.

But ‘willing and able’ is the key consideration here. In my last family office job, I to secure a credit line against our fund portfolio.. But in our case, our relationship bank was not willing, for a few reasons: One, they were not “on-platform” funds, but external, meaning the bank would require us to pledge each individual fund, or to provide an unsecured loan against the portfolio (i.e. no specific pledge of collateral) - neither of which they wanted to deal with. Two, while some of our funds were ‘brand name’, many others were smaller, less-known PE and VC funds for which the bank didn’t see an active secondary market. And third and last, our portfolio hadn’t yet reached its cashflow break-even, meaning that we’d use some of the loan to fund capital calls. We could’ve lent against a few select fund positions at another bank, but that made up just a small share of our fund portfolio - making it less viable overall.

Hence, a word of advice: If you are looking to build a fund portfolio that can serve as collateral, either be patient until it is break-even, or simply build it on the ‘platform’ of a private bank willing to extend such credit. Otherwise, you might either not get a loan at all, or receive it at terms that (at least in my experience) are not worth the effort.

Just last week, I spoke to a start-up founder who asked me a question I frequently receive: I have the vast majority (90%+) of my net worth locked up in the stake in my own company. Who will give me a loan secured by that?

While an extremely valuable asset on paper, actually receiving liquidity against such a stake is challenging. In my banking days, I remember a founder with a substantial position in a company that was soon going public, and who was looking to already access some of their equally substantial IPO proceeds. While the overall LTV was very low (<5% if I remember correctly), the bank struggled to provide a loan. The reasons, in my view, apply to many of the founders who ask me about lending options:

Such a loan might become more probable your company goes public (or is close to it), or in some cases, has already (partially) sold and you are subject to highly plannable earn-out that the bank can lend against (i.e. 10% of the purchase price each year for the next 3 years, paid by a creditworthy buyer). But of course, that perfectly describes the situation from my introductory paragraphs: You’ll get access to debt when you don’t actually need it anymore.

But not all is lost. As the title of this section describes: You might get lucky - and find a bank who is willing to extend you credit against all common standards.

Why would the bank want to do it? Simple - they are hoping to go into business with you. Whether that is you as a founder as a future wealth management client, or the company directly, for example by mandating the bank to later sell it or take it public. In such cases, you might receive a loan at terms that are in no way appropriate to the risk that the bank is taking on - think margin loan-like terms. Can you plan on it? Likely not - your time is probably better spent on either negotiating a secondary, or on using your ‘creditworthiness’ as a well-paid managing director at your company to take out traditional loans (for example for real estate investments). But if you do get lucky and find a bank, good for you - just remember that the bank will likely have expectations of your future relationship.

Curious how lending options can fit into your portfolio - or perhaps you’re already looking for ways to gain liquidity from your illiquid assets? At Cape May Wealth Advisors, we have helped many of our clients ranging from affluent individuals to family offices with identifying creative paths to liquidity - including lending options, structured secondaries, and more.

Interested in learning more? We’d be happy to help -  reach out to us:

There are a few lending options that I will not elaborate on further today, such as lending against start-up portfolios (rare, and very expensive), lending against majority stakes in profitable businesses (just traditional corporate lending), or ‘emergency financings’ provided by debt funds (cutthroat interest rates, and an upside share). Instead, I want to use this final section to answer another question: Should you take out debt against your illiquid assets - funds or stakes alike?

Once again, this goes back to a strong opinion of ours: That many lending options are fundamentally long-term-oriented ‘measures’, and thus should be used as a strategic, long-term option, and not for short-term cash management. To go through our three options:

Lastly, don’t forget that especially those illiquid lending options cost interest that needs to be paid. 6-8% p.a. doesn’t seem like a lot when your venture or fund portfolio is seeing double-digit returns (before taxes). But remember that your (paper) gains are often not liquid, while your interest payments still come due regularly.

Can those lending options be useful? Absolutely. At low LTVs, and paired with other sources of liquidity as a fallback, they can help you bridge gaps in your cash flow profile, letting you avoid having to sell off any well-performing assets to fill ‘gaps’ of lesser-performing assets. But they can also go differently than planned - which can cause financial consequences, and considerable headaches. 

Debt, taken out against liquid or illiquid assets, can be a powerful tool. But only if used with discipline, foresight, and a fitting time horizon.

Cape May Wealth Advisors is a Berlin-based wealth management firm focused on helping affluent entrepreneurs find financial independence. If you are interested in learning more about how we can help you, reach out to us via email, and make sure to subscribe to our newsletter.